How real estate is valued
Knowledge of how real estate is valued is indispensable, especially if you are buying or selling a property. Numerous questions may arise, such as: What is the market value? Read on to learn how residential properties are valued and when it makes sense to have your home reappraised.
The purpose of a real estate valuation is to determine the value of a property. That value is especially important when purchasing or selling property. In Switzerland, the valuation of a single-family dwelling or a condominium reveals the market value of the property. The market value corresponds to the price that is likely to be obtained within a year under normal market conditions.
The proportion that each of the individual factors contributes to the total value of real estate can vary greatly from region to region. In urban centers, where the demand for residential property is consistently high due to the proximity to major cities such as Zurich or Basel, the land value accounts for a large part of the value of real estate. Conversely, in more sparsely populated, rural areas, the house or apartment itself will account for a larger proportion of the total value. Nevertheless, the land price is considered to be the main driver of price trends. And land prices, for their part, are influenced by a second factor in addition to proximity to cities: The lower the tax rates, the higher the price of the land and the property on it.
The market value of a property can be calculated using various methods, some of which differ considerably. For example, owners can consult experts from various institutions, or call an appraiser to value their property. To value a single-family dwelling or a condominium, Credit Suisse uses the hedonic method. This is a computer-assisted, comparative value method, based on a statistical process.
The hedonic method considers the purchase prices of properties with as many comparable features as possible. Key parameters in this process include the location, applicable tax multiple, property size, property age, condition of the building, and other aspects of the property's quality. To calculate the market value of the property, experts analyze the parameters according to their weighting with the help of the valuation software.
The starting point of the real value method is the assumption that a potential buyer would not pay more for a property than it would cost to build it new today. The real value therefore corresponds to the costs that would be incurred to construct the building from scratch today. The practical application of this method means that it does not take into account fluctuations in supply and demand on the real estate market, so it is better suited for properties that are difficult to compare, such as remote buildings or specialist structures.
With the capitalized income value method, the value of a property is determined by calculating future income and costs. These include, for example, expected rental income, the remaining useful life of the property, and maintenance costs. This method is suitable for office buildings as well as for shopping centers or residential buildings for which the rental income plays a significant role.
FAQs on real estate valuation
How do I find out for myself how much a property is worth?
Online tools allow you to assess a property's value free of charge in just a few clicks. All you have to do is enter details such as the address, floor area, year of construction, and condition of the property. These online tools provide you with an initial estimate of the value of the property. However, the results do not necessarily reflect the actual market value of the property. Moreover, it is often unclear on which method the estimate is based.
How can I value a property myself?
Owners can also value their property themselves using a variety of online tools. One such tool is the Credit Suisse Property Cockpit, which offers a free, real-time estimate of the market value of your property along with further information about sale price and much more.
Click here to go to the Property Cockpit.
Who can value a property?
Owners are usually not able to objectively assess a residential property, its condition, and official value. The owner's estimate of the property's market value tends to be too high. Bank experts, professional appraisers, or, depending on the situation, administrators can calculate the true value of a property. Using their extensive expertise and experience, they are able to take individual features into account, such as period construction elements or an unusual location.
How much does it cost to have a property valued?
A real estate valuation by a certified expert will cost about CHF 1,000.
Is it worth getting a second opinion on a real estate valuation?
If you have doubts about the initial valuation of the property, you should get a second opinion. Valuations of real estate may differ considerably depending on the method used. It is better to be safe than sorry. Then you won't run the risk of nasty surprises when you buy or sell the property, for example if the property sells below market value.
The market value is the basis for the long-term financing of real estate. Therefore, it plays a crucial role in obtaining a mortgage. If the established market value differs from the asking price of the property, the mortgage will be calculated based on the lower of cost or market principle. This principle states that the lower of the two values shall always apply if the purchase price and the market value differ. So, if the market value is less than the purchase price, the maximum mortgage amount is lower. This means that purchasers must contribute a greater share of their own capital. This amount increases by the difference between the market value and the purchase price.
The market value of a single family dwelling was estimated to be CHF 850,000, but the purchase price is CHF 1,000,000. According to lower of cost or market principle, the mortgage will be calculated based on CHF 850,000. The buyer will have to finance the difference of CHF 150,000 between the market value and the purchase price entirely from his or her own funds. That increases the equity capital required from CHF 170,000 to CHF 320,000.
|Mortgage (max. 80%)
|Difference: purchase price to market value
|Total equity capital
All amounts in Swiss francs.
A property's market value changes over time. Basically, the value of the building gradually decreases. In order to maintain the value of a property in the long term, renovations frequently have to be undertaken. By contrast, the value of the property goes up if the price of the land increases or if the building gains added value. For example, adding a conservatory or building a pool can increase the value. The value also increases if demand exceeds supply, for example in urban centers such as Zurich or Geneva.
The bank may be carrying the property on its books at the original purchase price, especially if you have been living in the same place for a relatively long time. However, that is precisely the value on which calculations for repayment, interest, and the maximum loan-to-value ratio are based. If the market value has increased, having the property reappraised gives the owner more scope to finance any investment that may be required by increasing their mortgage. The market value of a property may also be crucial in the event of inheritance or divorce. Therefore, it can pay off to have a property reappraised from time to time.